How Should I Transfer My Real Estate to My Adult Children?

It’s a common question.  Parents want to know the easiest way to transfer their real estate to their adult children, without a big hassle at the time they pass away.  It sounds simple enough, but there are pitfalls if you don’t do it right.

In the past, many have just added the children on to the deed of the property.  If they are already owners of the property, then nothing needs to happen once the parents pass away.  Right?  Yes, but…  While adding the children directly onto the deed simplifies transfer of ownership once the parents pass away, it creates a new set of issues and challenges.  Adding an adult child or children onto a deed could trigger gift tax obligations on the part of the parents at the time of the addition, and it can even jeopardize homestead rights if your state has homestead protections.

Furthermore, the children would not be able to take advantage of the stepped-up basis for capital gains taxes if, or when, they sell the property.  So, for example, if the parents purchased the house in the 1980s for $50,000, and now the children sell the property in 2022 for $450,000, the children will have to pay capital gains taxes on the $400,000 increase in value of the property.  Conversely, if the children receive the property through some type of testamentary transfer, such as a Trust or Beneficiary Deed (also called a Transfer on Death Deed), the capital gains taxes would be calculated from the date of the transfer, which would be the date of the last parent’s passing.  Assuming the last parent passed away in 2022, and the children sell the property in 2022 the capital gains taxes would essentially be $0.00.  That’s a big difference.

From an estate planning perspective, the preferred way to transfer a piece of real estate to your children would be to use a Trust or a Beneficiary Deed.  By using one of these tools, the parents avoid gift tax pitfalls, and the children may save quite a bit when it comes time to sell the property.  Both of these options can also avoid probate court.

If this is an issue you are facing, please take some time to discuss the different options with an estate planning attorney. At Fears Law, we can help.